Vince Cable's speech to the Liberal Democrats Autumn 2009 Conference

The next General Election will be fought over the economy: who can be trusted to deal with the legacy of financial collapse and recession? There are those who would have the British people believe that there are only two options:

One is to trust the people who led us in to the present mess to get us out of it: but this would be a triumph of hope over experience. There are only so many ways of saying that Labour is finished and they've already been said.

The question the country is asking is whether they can trust instead a team of young things who have no beliefs or convictions, beyond a sense of entitlement to rule and a mission to look after their own. And whose life time experience of business is confined to managing their Bullingdon Club bar accounts.

The fact is that the country faces enormous economic challenges: tackling rising unemployment, the failed banking system, falling tax revenues and rising public spending; balancing economic recovery with environmental imperatives. These are big jobs for people who've been tested in the real world of work.

Our economy has experienced a massive heart attack, with the banks at its centre. It has survived in the Intensive Care Unit and is now showing signs of life thanks to modern economic medicine. Interest rates have been slashed. Vast amounts of monetary steroids have been pumped in the system thanks to quantitative easing. Enormous fiscal deficits have been incurred. The banking system rescued and part-nationalised across the globe. The clinicians, the Central Banks, and governments, deserve praise for prompt action. But serious damage has been done. Life will not be the same again. Lifestyles have to change.

So let me set out the practical steps to recovery: what I would do if I were Lib Dem Chancellor. Urgent action is required on unemployment. At least three quarters of a million more people have been made unemployed since this time last year. A million young people under 25 are now jobless. Let me give you a quote 'The most urgent problem of all is unemployment - it is bad business. It injures the morale of hundreds and thousands of young people who have not gained the habit of work.' Not my words but David Lloyd George's in the 1929 general election. Who would have believed that we would be back there again? Or indeed, reliving the tragedy of Thatcher's Britain when a generation of workers were thrown on the scrapheap. What is to be done?

We have got to stop private sector jobs bleeding away as good, credit worthy companies are throttled by the banks. The banks have lurched from the irresponsible, binge lending which caused the crisis to the equally senseless hoarding of capital which is now destroying jobs and suffocating enterprise. The banks which have been rescued or underwritten by the taxpayer must be treated as the servants, not the masters, of the economy.

The unemployed must be found productive work. We should learn from the experience of Scandinavia and other countries where the alternative to long term unemployment is a guarantee - and a requirement - to work, or for young people train or study. There is no shortage of socially useful tasks - improving homes, environmental projects, care work - which can be undertaken on the basis of voluntary sector and local government initiatives. There are also some imaginative private sector schemes like the plan to create half a million IT jobs. There must also be more apprenticeships to ensure that the next generation learns skills and trades: real, not financial, engineering.

And commonsense suggests that it is more rational to pay people to do something useful rather than pay them to sit idle, on benefit and paying no tax. It is why we fundamentally disagree with the Conservative approach which is to sit still and watch unemployment grow.

But once recession recedes we have to tackle the next big challenge: managing the massive and unsustainable public sector borrowing.

We should not be taken in by the hysterical nonsense about the country being bankrupt. It isn't. But there is a big problem. The public doesn't need George Osborne's imaginary, secret documents or conspiracy theories to work out that the public finances are in a bad shape. The government is living beyond its means and has absorbed the massive cost of the financial collapse. Government tax receipts as a share of national income, have collapsed to a level lower than at any time since Harold Macmillan was Prime Minister half a century ago. The enormous budget deficit isn't just because of recession. There is a structural problem. Public spending expanded on the back of tax receipts from financial services and an inflated housing market: temporary windfalls which were treated as permanent. The Government deficit will need to be cut substantially. If it isn't there will be a risk of escalating borrowing costs and a debt trap.

Spending first. If public spending is cut in the usual way - slash and burn - there will be great damage to local and national services. Good will be cut with bad. Front line services will be butchered and lower paid workers will bear the brunt of cuts. There will be particular damage to public investment in areas like social housing which we need desperately to rebuild houses to rent. So what are the alternatives? So, we have to set priorities and decide what government should and shouldn't do. I don't pretend that the task will be easy or popular. But I have a few ideas as to how we would start.

We must stop civil service bonuses and the culture of massively inflated salaries. A freeze in the total pay bill is better than cuts in services. There are far too many government officials and quangos overseeing local government, the NHS and teachers. There is no need for the vast central government databases, like the ID card, the so called 'super database' and the NHS scheme. Tax credits extend too far up the income scale. There are too many unaffordable defence commitments and procurement contracts including new Trident submarines. Civil service mandarins - and MPs - enjoy very generous subsidised public sector pensions which desperately need reform. This system is grossly unfair when the basic state pension is less than the poverty level; when the pension age is to rise to 68; and occupational pensions in private firms have been cut to shreds.

Then the industrial welfare state absorbs billions through Regional Development Agencies and other quangos of questionable relevance. And we all love the NHS but no-one can seriously claim that it couldn't be better run. All aspects of public spending have to be looked at critically, as our councils have to do as a matter of course.

There is no credibility and no future in being the last of the big spenders. Don't get me wrong. I can, personally, think of lots of things that it would be desirable to spend lots of money on: mental health, adult education, childrens' hospices - and bee research and science in general - are things I have campaigned for. But economic reality means that if more is spent on some items there is less elsewhere. Politicians offering their expensive freebies will be treated with the same contempt as bankers lapping up their double cream bonuses, year after year, succeed or fail.

No-one does political cynicism better than the Tories. They pose as tough guys cutting spending sooner and deeper than anyone else. But we have just exposed them as committed to a massive £53 billion of extra spending - more than the total defence budget. If we did that we would be accused of being fantasists or dishonest or indisciplined. But these people are so arrogant they think they can cruise into Downing St without anyone noticing.

The Liberal Democrat approach to spending, is fundamentally different from the Tories. The Tories propose cuts, carried out in secret behind closed doors after the Election, if they win. We want an open, democratic debate about priorities. They want to control everything from Whitehall - just like Labour. We believe in local government. Local decision making is more accountable and more efficient. This requires lifting the dead hand of centralisation and scrapping the command and control quangos who treat local elected representatives like children. We would give additional roles to councils through health commissioning. And with that duty should go responsibility including more local revenue raising powers including business rates.

The Liberal Democrat approach to tax is also fundamentally different from the Tories. The Tories top priority is to cut taxes on millionaires. Our top priority is fairer taxes for those on lower and middle incomes.

It would be dishonest and unbelievable for me to say that taxes overall should never rise. But the Liberal Democrats' starting point is to aim for fairer not higher taxes. I would do this by lifting tax thresholds, providing an incentive to work and to save. It is wrong that people on the minimum wage should be dragged into tax. Lifting the threshold to £10,000 would mean that 4 million low paid workers and pensioners would no longer have to pay any income tax.

So, my priority would be to cut income tax for those on low and middle incomes. Any such tax cut would be paid for by closing tax loopholes and privileges enjoyed by the relatively wealthy: the big differential between top rate income and capital gains tax; the exceptionally generous tax relief on large pension pots; and the blatant abuse of tax haven status including businesses paying stamp duty offshore. A programme due to be screened this evening will expose complicity on a large scale in tax dodging by Lloyds: a bank part owned by the tax payer. This must be stopped, now.

You may also recall that I proposed a small annual levy - half a penny in the pound - on property values over one million pounds. Since then we have seen the super-rich pouring their money not into job creating businesses but into acquiring mansions. And remember too that under our unfair council tax Messrs Mittal and Abramovich in their £30m palaces pay the same as a band H family home though their properties may be worth 40 or 50 times as much. That small levy alone would lift 300,000 low paid workers and pensioners out of tax.

We must also lead the debate on tax reform as a Liberal government did a century ago with the People's Budget. We should aim to shift the tax burden further from income - work, savings and innovation - onto pollution - the green tax switch. Switching taxation onto financial pollution - questionable transactions of no social and economic value. And onto land values instead of penalising productive investment. But at the heart of our tax plans must be a commitment to social justice.

We have a seriously distorted economy, over dependent for growth and revenue on financial services. Gordon Brown's unwillingness to take on the vested financial interests is pathetic. The principles should be clear. Full compulsory disclosure of all pay, bonuses and perks for those earning more than the Prime Minister. The break up of the big banks which are currently too big to fail so that the taxpayer is no longer underwriting casinos. Casinos belong in Las Vegas not in banking. We want straightforward, simple banks which do the basics well; not laboratories for financial rocket scientists.

We need a financing mechanism which can meet the investment needs of big long-term projects which will lie at the heart of a green economy: tidal power, high speed rail, carbon capture and storage, telecommunications infrastructure. Bank finance and the stock market are, on their own, too short term. Yet there is billions of pounds worth of potential private investment looking for a safe long term return on equity or bonds. There are frustrated British small savers looking for a better outlet for their money. What is needed is a British version of the European Investment Bank or Obama's US Investment Bank which can bring together private capital and professional management under government sponsorship.

Britain's economic heart attack has been traumatic and life threatening. But it also serves as a warning to change lifestyles in a radical way. The Liberal Democrats under Nick Clegg's leadership have a duty as well as an opportunity to press home the message about fundamental rather than superficial: political and economic change. The other two parties, like the banks, are desperate to return to business as usual. But that is no longer an option.

The country now faces a bigger set of economic and political challenges than at any time since the Second World War. Gordon Brown's government is exhausted: it is like an extinct volcano. We have a so-called official opposition which is callow and pitifully ill-equipped - politically, morally and intellectually - for the task ahead. By contrast, the Liberal Democrats have the expertise and the commitment to fairness so obviously lacking in the other parties. If there were ever a time for the Liberal Democrats, this is it.